Facebook Sponsored Stories Settlement: The Cost of Doing Business

September 12, 2013

Thursday, September 12, 2013, by David Fitzgerald
US District Judge Richard Seeborg approved a settlement last week between Facebook and 614,000 members of a class action suit originally filed in 2011. The crux of the lawsuit stemmed from Facebook’s alleged misuse of its users’ personal information—including “names, photographs, likenesses, and identities”— without consent in generating advertising sales known as “Sponsored Stories.”  “Sponsored Stories are a form of advertising that typically contain posts which appear on facebook.com about or from a Facebook user or entity that a business, organization, or individual has paid to promote so there is a better chance that the posts will be seen by the user or entity’s chosen audience.”
The main contention of the plaintiffs was that the unapproved use of their personal information under the Sponsored Stories scheme violated California Civil Code § 3344 governing the use of another’s likeness for solicitation purposes.  Facebook is no stranger to privacy litigation.  In 2009, it was forced to abandon its Beacon advertising system after it was found to have violated the Electronic Communications Privacy Act among a host of other laws.  Other social networking sites, like tagged.com, have fared no better when implementing deceptive marketing strategies.  With this historical backdrop, it is easy to see why Facebook would settle rather than face declaratory judgment on its use of Sponsored Stories.  But what has Facebook really surrendered in the present settlement?
Facebook essentially agreed to three primary forms of relief in its settlement agreement.  First, it agreed to pay $20 million dollars into a fund to pay claims of Class Members who appeared in a Sponsored Story.  This may sound like a large sum.  Considering Reuters estimates Facebook garnered $234 million from Sponsored Stories advertising in just over 18 months, however, $20 million (or around $15 per Class Member) seems like a pretty good deal for Facebook.  It represents less than 9% of the revenues from this particular advertising scheme.

Facebook’s settlement agreement looks less like a “fair, reasonable and adequate relief to the class,” than it does a shrewd understanding that such settlements may simply be a cost of doing business.

Next, Facebook agreed to revise its terms of service (known as the “Statement of Rights and Responsibilities”) to more fully explain the instances in which Class Members agree to the display of their names and profile pictures in connection with Sponsored Stories.  This may be a calculated move by Facebook relying, in large part, on the apathy of its users.  Facebook’s continued dominance of the social networking market combined with the fact that only 614,000 of over 150 million (just .4%) users potentially affected by the Sponsored Stories elected to join the suit makes it unlikely that the revised privacy statement will have any real effect in altering members’ online behavior.
Last, Facebook agreed to provide parents and guardians of minor users with a more thorough explanation of Facebook’s advertising policy.  This of course requires the parents to also be Facebook users (who are in turn subject to Sponsored Stories).  If the minor indicates his parents are not on Facebook, then the website will make the minor ineligible to appear in Sponsored Stories until he or she reaches the age of 18 (or until the parent joins FB and a family relationship online is established).  This requires the minor to take the affirmative action of actually indicating his parents are not Facebook users in his or her privacy settings.  Given the statistical apathy toward advertising policies of adult Facebook users cited above, and advertisers’ awareness of the modern buying power of children, this still bodes well for Facebook’s bottom line.
Some online privacy watchdog groups have decried the reworded Statement of Rights and Responsibilities as actually giving Facebook more latitude in using the names and likenesses of its member than the one giving rise to the current settlement.  The new version states Facebook users “permit a business or other entity to pay us to display your name and/or profile picture with your content or information, without any compensation to you.”  Contrast that disclaimer with the old version that advised user privacy setting could “limit how your name and profile picture may be associated with commercial, sponsored, or related content.”
The targeting of minors is of particular concern to such privacy advocates.  Some states, like California, require nonfinancial businesses to disclose what personal user information is sold to third parties even for adult users.  Other states, Minnesota and Nevada among them, have already taken statutory action placing the burden of affirmative steps for permission on the online service provider rather than allowing presumed consent by use.  The Facebook settlement concession pertaining to minor users allows Facebook to presume parental consent for the commercial exploitation of their children’s online profiles.  A joint letter from the nation’s six largest privacy watchdog’s to the FTC says the reworded privacy statement “eviscerates any meaningful limits over the commercial exploitation of the images and names of young Facebook users.”
The current scope and deterrent effect of the Electronic Communications Privacy Act are policy questions that go beyond the scope of this post.  However, Facebook’s continued use of marketing practices that push the envelope of acceptability under the ECPA seems likely.  Despite a history of legal issues surrounding its advertising tactics, Facebook has emerged from yet another round of privacy litigation with a relative “slap on the wrist.”  Even after payment of the settlement agreement, Facebook will net an estimated $214 million in advertising revenues from its “Sponsored Stories.”  Moreover, Facebook has admitted no wrong-doing and will be allowed to continue this practice with only minor (and arguably advantageous) concessions.
In light of these facts, Facebook’s settlement agreement looks less like a “fair, reasonable and adequate relief to the class,” than it does a shrewd understanding that such settlements may simply be a cost of doing business.